David Stockman Takes On the Fed's Easy-Money Policies—and the World

David Stockman, Ronald Reagan's first budget director, has recently released a book titled The Great Deformation: The Corruption of Capitalism in America. Stockman believes the Federal Reserve has entered unsafe and unknown territory and has artificially propped up the prices of fixed-income assets and driven interest rates to absurdly low levels.

By William D. Cohan
June 27, 2013
BusinessWeek

Roosevelt House, on East 65th Street on Manhattan’s Upper East Side, is hallowed ground for progressives. FDR and Eleanor Roosevelt lived in the six-story townhouse between 1908 and 1933, before moving to the White House. Roosevelt assembled his Cabinet at the residence, and many of the economic policies that became the New Deal were devised there. Considering that history, it was odd to find a crowd of 100 gathered at Roosevelt House in mid-May to hear a talk by David Stockman—a man who, as Ronald Reagan’s first budget director, embodied the supply-side economic philosophy that’s anathema to New Dealers. Stockman’s book, The Great Deformation: The Corruption of Capitalism in America, had been out for a month. He thanked his hostess for her introduction. “It’s the first time anybody has said anything nice,” he said. He proceeded to list those who’ve denounced his book: “The Republicans, the Democrats, and the Keynesians, and the monetarists, and the supply-siders, and Wall Street, and Bay Street, and the military-industrial complex, and also the neocons and the social-cons and the just-cons. And for those of you who haven’t heard of the just-cons, that’s everybody else in Washington that doesn’t fit the other categories.”

Despite all that scorn—or perhaps because of it—Stockman’s book is a hit. In April it made its debut at No. 4 on the New York Times Best Seller list, and it stayed on the list for a month. Not bad for a 768-page tome that spans eight decades of U.S. economic history. The 66-year-old Stockman appeared on Charlie Rose and The Daily Show With Jon Stewart, declaiming the need to save America’s economy from its addiction to what he calls “monetary heroin,” the U.S. Federal Reserve’s penchant for printing money, keeping interest rates artificially low, and encouraging asset bubbles.

In Stockman’s view, the Federal Reserve has entered unsafe and unknown territory. In nearly doubling its balance sheet to $3.2 trillion in assets since October 2008, the Fed has artificially propped up the prices of fixed-income assets and driven interest rates to absurdly low levels. The Fed’s actions have left investors with little choice but to seek higher yields by mispricing risk. Worse, he argues, all the new money that the Fed has pumped into Wall Street is not getting to Main Street, where theoretically it could be used to help the economy grow; instead, it’s just being pushed around by traders. While Wall Street cashes in, yet another new, dangerous financial bubble is being inflated—all of which has left the U.S. economy at risk of another 2008-style meltdown. Only this time, Stockman wrote in the New York Times on March 30, “there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.”

Stockman’s doomsdaying was ridiculed by Paul Krugman, who denounced his Times guest column as “sad” and “cranky old man stuff.” Jared Bernstein, a former top economic adviser in the Obama White House, condemned Stockman’s “dystopic, Hunger Games vision of America … it’s like hearing a crazy person on a street corner.” Stockman has also alienated his traditional allies on Wall Street, who love the Fed’s policies. And in a May interview with me at his apartment in Midtown Manhattan—Stockman and his wife, Jennifer, recently moved there from Greenwich, Conn.—he castigated several prominent Republicans, including members of George W. Bush’s administration, in bracingly candid terms.

Stockman’s odyssey from the face of the Reagan Revolution to scourge of the economic establishment involves, as he describes it, a “road to Damascus” conversion, brought on by a disastrous deal that caused his own Wall Street career to unravel. In proselytizing about the unforeseen dangers of too much risk and too much debt, he speaks from experience.

Stockman was raised in a brick farmhouse in western Michigan built by his grandfather, who was the county treasurer for more than 20 years. It was he who got Stockman interested in public service and entrepreneurial capitalism. “We had a little of everything,” Stockman told journalist William Greider more than 30 years ago, “an acre of strawberries, an acre of peaches, a field of corn, 15 cows. We did everything.” Stockman attended Harvard Divinity School before entering politics. He represented his home district in Congress for four years before Reagan plucked him from obscurity at age 34 to be his director of the Office of Management and Budget. Stockman’s mission was to somehow figure out how to raise the defense budget, cut income taxes, and balance the budget, all at the same time.

To pull it off, he converted to the then-trendy idea of supply-side economics. According to the theory, cutting income taxes would spur overall economic growth by encouraging individuals to spend the money they were no longer paying in taxes, which would in turn spur businesses to hire more people and build plants and invest in equipment to increase the supply of goods and services to meet demand for them. The virtuous circle of rising employment and income would send newfound revenue to the Treasury, allowing for budget deficits to be reduced while defense spending increased.

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